New Company Formation: LLC vs Corporation

Disclaimer: I am not an attorney and this post should not be construed as giving legal advice. Before making any final decisions about what type of entity is best for your company, you should consult a competent attorney licensed in the state you form your chartered entities.

One of our podcast listeners asked the question recently, “What are the differences between a corporation and an LLC, and what the financial implications of each are.

LLC is the abbreviation for Limited Liability Company.

For the sake of this discussion, I will compare “S” corps with LLCs, since most small single owner corporations tend to be “S” corps rather than “C” corps. The “S” and “C” refer to a section in the IRS tax code that provides rules for each type of company.

Many tax and corporate structure laws have changed over the last 20 years. Currently, many business attorneys favor the LLC as the best choice for a sole member LLC. Nearly all of the benefits of being either an S corp or an LLC are similar. There are a few differences in structure and taxation.

Both corporations and LLCs are considered chartered entities in our discussion. Non-chartered entities are sole proprietorships and partnerships. The state in which you form your charter entity may have various additional considerations in addition to those mentioned here.

There are a number of similar documents used to form both corporations and LLCs. The primary document to form a corporation is called Articles of Incorporation, whereas LLCs file an Article of Organization. Corporations have shareholders whereas LLCs have members. Typically, a president of a corporation would be called a managing member of an LLC. Instead of corporate bylaws as a company’s set of operating rules, LLCs use a document called an organizational agreement.

Terminology aside, there are more similarities between “S” corporations and LLCs then there are differences.

The following entity attributes are the same for both: Formation requirements and costs to organize may very slightly by state, but are very similar.

Costs to organize both should be the same or very close.

Shareholders of corporations and members of LLCs are protected by the same personal liability protections.

LLCs may have a few less administrative requirements than “S” corps, but if your LLC has more than one member you should follow the same meeting requirements that a multiple member “S” corporation follows.

Federal income taxation is the same for LLCs as it is for “S” corps. In both cases income is passed through to members or shareholders and taxed at their individual level.

Federal Income tax reporting is easier for a single member LLC then it is a single member “S” corp. single member LLCs report their tax data on a IRS schedule C, just as a sole proprietor does. All “S” corps must file form 1120S forms which adds complexity and possibly expenses to tax return preparation.

Raising capital for both types of entities is possible and varies by state security laws. Federal security laws apply equally to both. Capital is called stock for corporations and interest in LLCs.

Ease of operation is a little easier for LLCs because they are not required to have an annual board of directors meeting, corporate minutes, and stockholder meetings.

Expert Profile

Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions. Since 1994 he has been in the banking and finance industry as a commercial lending officer, banking consultant, and advocate for small business financing. He has originated over $400 million in loans to hundreds of businesses across many industries. Sam is a nationally respected working capital finance professional, speaker, and writer. Sam also teaches classes to trade associations and other groups. He has been praised by readers and class attendees in programs he teaches for his ability to explain complicated financial concepts in easy to understand terms. For more information about using a SBIC fund to help your business grown, email info@bfs-usa.com or give us a call at 512.990.8756.

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